Rodney Fort's Sports
Economics
Chapter 4 Team Cost, Profit,
and Winning
Table 4-1
Operating Expenses for the Seattle Mariners 1993 to 1998 ($Thousands) (slide 1 of 2)
1993
1994
1995
1996
1997
1998
$32,612
$20,918
$29,732
$39,313
$43,815
$52,392
Team Operations
$5,200
$3,825
$5,219
$4,530
$5,353
$6,281
Scouting/Player Development
$6,458
$5,205
$6,030
$6,375
$7,017
$7,606
Kingdome Operations
$1,898
$1,388
$1,864
$2,777
$3,383
$3,888
Marketing, Publicity, Ticket operations
$3,186
$2,663
$2,819
$4,239
$4,859
$5,990
General and Administrative
$5,501
$4,798
$5,385
$6,765
$7,395
$7,430
Net Int. and Other Expenses
$411
$178
$1,324
$1,274
$1,197
$1,230
$613
$3,364
$3,417
$65,886
$76,383
$88,234
Baseball Operations
Player Compensation
Other Operating Expenses
King County Settlement*
-$4,204
ML Revenue Sharing Agreement**
Total Operating Expenses
$55,266
$34,771
$52,373
Table 4-1
Operating Expenses for the Seattle Mariners 1993 to 1998 ($Thousands) (slide 2 of 2)
Other Expenses
Signing Bonuses
$4,540
$2,049
$5,019
$5,164
Depreciation and Amortization***
Total Expenses
$59,806
$36,820
$57,392
$71,050
*One-time settlement in a political agreement between the team and King County.
**The so-called “luxury tax” that shares revenues among MLB owners
***Only reported for 1997 and 1998.
$5,025
$3,572
$9,237
$6,176
$90,645
$97,982
$Millions
Figure 4-1
Hypothetical Short-Run Cost Functions
$160.00
$150.00
$140.00
$130.00
$120.00
$110.00
$100.00
$90.00
SRTC
TVC
86.6
$80.00
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$0.00
65.8
TFC
20.8
0
0.5
1
1.5
2
2.5
3
3.5
2.9
Attendance (millions)
4
4.5
5
5.5
Legend: Based on the Mariners’ example in the text, at attendance of about 2.9 million, total variable costs (TVC)
equal $20.8 million, total fixed costs (TFC) equal $65.8 million and their sum, short run total cost (SRTC) equals
$86.6 million. The shapes are hypothetical, based on the idea of diminishing returns to variable inputs– at first,
adding variable inputs to fixed raises costs as a decreasing rate but, eventually, costs must rise at an increasing rate.
Table 4-2
Fixed and Variable Costs for the Seattle Mariners 1993 to 1998 ($Thousands) (slide 1 of 2)
1993
1994
1995
1996
1997
1998
$32,612
$20,918
$29,732
$39,313
$43,815
$52,392
$4,540
$2,049
$5,019
$5,164
$5,025
$3,572
$613
$3,364
$3,417
$1,274
$1,197
$1,230
$9,237
$6,176
Short-Run Fixed Costs
Player Compensation
Signing Bonuses
Revenue Sharing Agreement*
Net Int. and Other Expenses
$411
$178
$1,324
Depreciation and Amortization**
Short-Run Fixed Costs Total
$37,563
$23,145
$36,075
$46,364
$62,638
$66,787
Marketing, Publicity, Ticket operations
$3,186
$2,663
$2,819
$4,239
$4,859
$5,990
Scouting/Player Development
$6,458
$5,205
$6,030
$6,375
$7,017
$7,606
Team Operations
$5,200
$3,825
$5,219
$4,530
$5,353
$6,281
Kingdome Operations
$1,898
$1,388
$1,864
$2,777
$3,383
$3,888
$16,742
$13,081
$15,932
$17,921
$20,612
$23,765
Short-Run Variable Costs
Short-Run Variable Costs Total
Table 4-2
Fixed and Variable Costs for the Seattle Mariners 1993 to 1998
($Thousands) (slide 2 of 2)
Mixed Category
General and Administrative
Short-Run Total Costs
$5,501
$4,798
$5,385
$6,765
$7,395
$7,430
$59,806
$41,024
$57,392
$71,050
$90,645
$97,982
*Pooled sharing began in 1996.
**Only reported in 1997 and 1998.
Source: Adapted from Table 4-1
Figure 4-2
Hypothetical Winning Percent Production Function MLB in the 1990s
Legend: Star players are added to a standard lineup in order to increase winning percent in the
long run. The relationship between the number of stars and winning percent, deduced from realworld data on stars and winning over time, is the winning percent production function. For
example, adding the first star increases winning percent by .009 (from Table 4-6). Its shape
cannot be dictated by diminishing returns since winning percent is a long run choice and all inputs
are variable. Limits to managing more and more stars must be the explanation.
Table 4-3
MLB Standings in 2003 (slide 1 of 2)
American League
Final
Winning Percent
East
National League
Final
Winning Percent
East
1. Yankees
0.623
1. Braves
0.623
2. Red Sox
0.586
2. Marlins
0.562
3. Blue Jays
0.531
3. Phillies
0.531
4. Orioles
0.438
4. Expos
0.512
5. Devil Rays
0.389
5. Mets
0.410
Central
Central
<TB>1. Twins
0.556
1. Cubs
0.543
2. White Sox
0.531
2. Astros
0.537
3. Royals
0.512
3. Cardinals
0.525
4. Indians
0.420
4. Pirates
0.463
5. Tigers
0.265
5. Reds
0.426
6. Brewers
0.420
Table 4-3
MLB Standings in 2003 (slide 2 of 2)
West
West
<TB>1. Athletics
0.593
1. Giants
0.621
2. Mariners
0.574
2. Dodgers
0.525
3. Angels
0.475
3. Diamondbacks
0.519
4. Rangers
0.438
4. Rockies
0.457
5. Padres
0.395
Figure 4-3
Hypothetical Long-Run Cost of Winning for MLB in 2008
Legend: Star players are added to a standard lineup in order to increase winning percent in the long run. If the price
of stars is known, then the long-run cost of winning percent is also known. For example, buying enough star talent to
play 0.429 costs $35 million, and so on (from Table 4.7). The shape of the curve where the total cost of winning
percent rises at a decreasing rate at first, but eventually rises at an increasing rate. follows from the same limit to
managing more stars that characterized the winning percent production function in Figure 4.2.
Table 4-4
Winning Percents in MLB in 2003
Average
Percent
Change
in Position
Increase
Needed to
Move Up
Places
1st-place team
0.593
2nd to 1st
0.040
2nd-place team
0.553
3rd to 2nd
0.037
3rd-place team
0.516
4th to 3rd
0.061
4th-place team
0.455
5th to 4th
0.078
Bottom-ranked teams
0.377
Figure 4-4
Owner Total Revenue for a Given Winning Percent
$
P
R(A) max
Demand
A0
R(A)
A0
Attendance
MR(A)
Legend: The relationship between demand, marginal revenue and total
revenue in the short run from Chapter 2.
Table 4-5
Winning Percents in MLB 1999 to 2003.
Average
Percent
Change
in Position
Increase
Needed to
Move Up
Places
1st-place team
0.597
2nd to 1st
0.046
2nd-place team
0.551
3rd to 2nd
0.050
3rd-place team
0.501
4th to 3rd
0.054
4th-place team
0.447
5th to 4th
0.039
Bottom-ranked teams
0.408
Figure 4-5
Total Revenue, Short Run Total Cost, and Profit for
Lower- and Higher-Quality Team Choices for a Given Owner (slide 1 of 2)
Lower Quality Choice, "W L"
Higher Quality Choice, "W H"
$
$
SRTC(A) H
SRTC(A) L
R(A) H
R(A) L
Attendance


 (A)
H
 (A)
L
0
A L
*
A L
1
A L
0
Attendance
0
AL < A L =>Losses
1
AL > A L =>Losses
Š$
*
A H
A H
1
A H
0
(A)
AH < A H =>Losses
1
L
AH > A H =>Losses
Š$
(A)
H
Figure 4-5
Total Revenue, Short Run Total Cost, and Profit for
Lower- and Higher-Quality Team Choices for a Given Owner (slide 2 of 2)
Legend: In the left-side panel, the difference between revenues and costs
for a lower quality team (subscripted L) gives the owner’s short run profits,
P(A)L., where P is profit and A is attendance. Losses occur below , reach
a maximum at and losses also are incurred if attendance goes beyond .
In the right-side panel, a higher quality team will generate higher revenue
than a lower quality team and higher costs since higher fixed costs are
incurred in order to hire more talent. The owner’s short run profits in this
case also are the difference between revenues and costs, P (A)H.
Similarly, losses are incurred at too low an attendance level, , they are a
maximum at , and losses again occur at too high an attendance level.
Table 4-6
A Hypothetical Production Schedule of Winning Percent
MLB in the 1990s
Stars
Total Winning Percent
0
0.420
1
0.429
2
0.448
3
0.466
4
0.490
5
0.528
6
0.598
7
0.646
8
0.680
9
0.695
10
0.700
Figure 4-6
The Owner’s Long Run Profit Opportunities
$
(W*)

 (W )
H

 (W )
L
0
W L =0.270
0.500
W
*
Winning Percent
1.000
W H =0.375
Š$
Legend: In the long run, the owner compares all possible profits that can be earned from all
quality choices in the short run. This is the definition of the long run profit function, P(W), where P
is profit and W is winning percent, or team quality. As depicted here, profits are higher at higher
winning percents, like 0.375 compared to 0.270. That is, . Profits eventually reach a maximum at
W*, that is, , and decline thereafter. In adopting this shape, we assume that, eventually, rising
costs of quality overtake rising revenues earned from higher quality teams.
Table 4-7
Hypothetical Total Cost of Winning for MLB
Team’s Total Winning
Percent
Player Annual Salary
($Millions)
Total Cost of Team
($Millions)
0
420
$25
$25
1
429
$10
$35
2
448
$10
$45
3
466
$10
$55
4
490
$11
$66
5
528
$12
$78
6
598
$13
$91
7
646
$14
$105
8
680
$15
$120
9
695
$16
$136
10
700
$20
$156
Number of Stars
Figure 4-7
Long Run Profit Opportunity Comparison
Big and Small Market Owners
$

 (W*B)

 (W* S)
0
*
W S
*
0.500 W B
Winning Percent
1.000
–$
Legend: Large market owners and smaller market owners have different profit
opportunities. As depicted here, the maximum long run profit for the big
market owner is greater than for the smaller market owner, . This also is
depicted to occur with the big market owner winning at a much greater level
than the smaller market owner.
Table 4-8
Seattle Supersonics Annual Operations Statements, 2000-01 through 2004-05 ($2009)
(slide 1 of 3)
Revenues
2000-01
Ticket Revenue
2001-02
2002-03
2003-04
2004-05
$6,322,893
$32,734,483
$32,642,784
$30,688,944
$31,744,548
$0
$2,518,973
$0
$134,833
$9,039,957
National Broadcast Revenue
$4,192,764
$32,940,139
$27,953,885
$27,983,980
$27,665,711
Local Broadcast and Sponsor
Revenue
$3,353,843
$20,480,897
$19,646,688
$18,915,958
$20,234,546
Suite Revenue
$1,013,643
$2,107,358
$1,861,992
$2,023,807
$1,489,960
$683,694
$2,290,352
$2,816,976
$1,532,441
$2,691,844
$0
$0
$10,428,860
$9,739,090
$0
NBA League-Wide Revenue Share
$625,147
$772,806
$2,119,732
$14,500,657
$1,911,906
Merchandise Sale
$268,374
$1,287,688
$1,421,044
$1,484,932
$2,435,027
$0
$804,520
$1,144,605
$1,597,964
$2,016,136
$210,523
$121,771
$703,805
$653,811
$514,283
$16,670,881
$96,058,987
$100,740,372
$109,256,415
$99,743,918
Playoff Revenue
Equity in Earnings of NBA
Parnerships
Luxury Tax Revenue
Concession Revenue
Other Revenue
Total
Table 4-8
Seattle Supersonics Annual Operations Statements, 2000-01 through 2004-05
($2009) (slide 2 of 3)
Costs and Expenses
Team and Game Expenses, Net
$17,722,927
$68,529,341
$78,267,947
$77,547,645
$81,241,211
Depreciation and Amortization
$29,041,833
$48,330,013
$25,933,716
$17,882,653
$12,293,206
General and Administrative
$7,740,733
$17,639,447
$18,920,022
$16,541,795
$14,269,289
Local Broadcast and Sponsor
Expenses
$2,792,008
$12,029,261
$12,055,111
$12,441,237
$4,722,828
Ticket Sales and Operating
Expenses
$1,169,141
$3,796,714
$4,857,162
$5,168,755
$6,737,187
Arena Expenses
$841,111
$1,422,170
$1,440,009
$1,468,050
$1,483,463
Community and Public
Relations
$588,580
$1,407,985
$1,223,913
$971,472
$1,372,566
$0
$1,582,423
$26,442
$193,665
$6,330,722
Cost of Merchandise Sales
$547,183
$640,763
$768,251
$886,096
$1,291,849
Other Expenses
$871,679
$418,300
$515,970
$425,653
$560,146
$61,315,195
$155,796,41
6
$144,008,54
3
$133,527,02
0
$130,302,465
Playoff Expenses
Total
Table 4-8
Seattle Supersonics Annual Operations Statements, 2000-01 through 2004-05
($2009) (slide 3 of 3)
-$44,644,314
$59,737,429
$43,268,170
$24,270,605
$30,558,547
Gain (Loss) On Sale of Asset
$0
$0
-$785
-$6,960
$17,018
Gain on Interest Rate Swap
$0
$0
$0
$301,298
$769,773
-$2,855,613
-$3,368,758
-$3,346,491
-$3,655,314
-$3,292,466
-$47,499,927
$63,106,187
$46,615,446
$27,631,580
$33,064,223
Loss from Operations
Interest Expense, Net
Net Loss
Notes: Schultz took formal financial control of the team on December 15,
2000. The purchase price as $200 million. The team fiscal year reportedly
ended on September 30.